Spare Parts Companies: Strategies for Ensuring Profitability
By Zilliant
Jan 26, 2023
Table of Contents
Among continued supply chain disruption, inflation, and other economic challenges, recent trends point to an increase in demand for B2B spare parts companies in 2023. In this post, we examine a few pricing and revenue optimization and management strategies spare parts companies can leverage to intelligently take advantage of this demand increase and ensure profitability.
An Increase in Demand Amid Economic Uncertainty
As we reach three years since the start of the global COVID pandemic, the business-disrupting economic challenges created in its wake are still going strong and even compounding. Continuing supply chain issues and market volatility have collided with recent inflation-driven high-interest rates and recessionary fears, which is adding up to an extremely complicated pricing and sales environment for the spare parts industry in 2023.
When narrowing in on the auto parts industry, this economic turmoil has created a weakened demand for new cars. However, there is a glimmer of opportunity for auto parts companies in 2023. As consumers hold on to their current vehicles for longer, the demand for parts appears to be on the rise. “The trend of driving older cars longer doesn’t seem to be slowing down. According to IHS Markit research, the average vehicle age was 11.9 years in 2020, 12.1 years in 2021 and is expected to be 12.6 by 2025,” according to SupplyChainBrain.com
This is a trend being seen in other spare parts sectors, including aerospace. “Strong travel demand and supply chain disruptions have forced airlines to fly older planes for a longer period, boosting demand for high-margin after-market services at companies such as Raytheon, which counts Boeing Co and Airbus SE among its customers,” reports Reuters.com.
While this increase in demand is beneficial, it doesn’t amount to much if B2B spare parts companies cannot avoid margin leakage and ensure profitability. Read on for a closer look into some impactful strategies spare parts companies can utilize to not only get ahead of economic and market volatility but level up their pricing and revenue optimization and management game and stay ahead of the competition.
Update Prices with Speed and Precision
Inflationary or deflationary cost fluctuations increase the need for frequent price updates. But for many B2B companies, when input prices rise, margin leakage grows due to an overreliance on legacy tools and processes used to pass through cost changes. Such legacy tools are not only ineffective in today’s digital age, but they lack the ability to deal with current inflationary pressures with the necessary speed and precision.
Inflation has provided air cover to raise system prices, but as interest rate hikes soften demand, distributors using a cost-plus pricing model risk cratering margin. The reason? Distributors that have taken the cost-plus, or “peanut butter spread” approach wherein prices are raised uniformly across the board will find their prices (and margins) plummeting if costs drop and they lack a means to surgically and softly lower pricing.
Rather than dropping prices quickly in one decrease, parts companies need to consider a more nuanced approach in which smaller price decreases are implemented in an agile and intentional manner. This scenario allows for more margin retention – and if a recession is on the horizon – success means holding on to margin gains for as long as possible.
Making price updates, especially those driven by inflation or deflation, is a delicate balance. That’s why modern price management software, such as Zilliant Price Manager™, is so critical. It can streamline burdensome manual price management processes and pass through input cost changes easily and efficiently.
With price management tools, pricing teams can set up cost pass-through strategies for any price type at any level of granularity. For example, a pricing team may update matrix prices as a function of supplier cost changes at the customer group and product sub-category levels, in addition to identifying all of the impacted customer-specific price agreement lines and performing a mass agreement update. This allows for prices to be updated quickly in a central location and delivered to sales quoting and agreement tools transparently, so price changes can easily be updated, delivered, and communicated to customers.
Additionally, price management tools eliminate guesswork and help capture more margin and manage cost fluctuations in any environment. When economic uncertainty disrupts the ordinary flow of business and threatens margins, these capabilities are the difference between leaders and laggards.
Consider this quote from Carlisle & Company Partner Gene Metheny from our Industry Roundtable Series: Auto Parts Distribution in 2022: “Distributors now need to rebase the level at which change is possible and how dynamic their price management processes are. We're not falling back to how it was before that - we need to adjust the pricing process to reflect that going forward rather than assuming that we'll go back to pre-pandemic processes and pre-pandemic industries.”
Cut Through Complexity with Data Science and Proactive Agreement Management
Pricing is often highly complex for spare parts companies because of: 1) the vast number of parts being sold and an incredibly massive customer base, and 2) customer price agreements that are plagued by the “set-and-forget” conundrum in which the agreed-to price gets set in a system and never revisited or touched on a regular basis, in addition to often having no end date.
To cut through the complexity, parts companies need to be leveraging the power of a price optimization and deal management solution.
Price Optimization
Price optimization allows B2B companies to set prices that make sense for each unique selling circumstance. A practical approach to data science is far superior to the outdated methods of spreadsheets or overly broad manual tools. Legacy pricing tools no longer reliably work to achieve financial targets. This is because they cannot simultaneously account for cost changes, competitive dynamics, good/better/best product relationships, customer relationships and types, geographies, order circumstances, and more. For success in today’s volatile economic landscape, a more sophisticated approach is necessary.
A price optimization solution, such as Zilliant Price IQ®, enables B2B spare parts companies to ensure rational and market-aligned prices, and, perhaps most importantly, calculates price elasticity to reveal how price changes will impact margin and volume before they are published in the market.
Intelligent Agreement Management
When it comes to customer price agreement management, B2B companies are finding that customer price agreements are vulnerable to the “set it and forget it” conundrum. Meaning, it’s difficult – if not impossible – to calculate how many customer price agreements exist in a business and determine how profitable they are (or are not). Instead, intelligent agreement management can centralize all agreements, ensure new agreements are created at prices that reflect the customer relationship and margin goals, enable mass updating of agreement lines, and facilitate seamless communication between pricing, sales, and customers.
An agreement management solution, such as Zilliant Deal Manager™, enables sales reps to be more proactive in agreement management through automated alerts that convey when agreements should be renewed, when price changes are needed, when volume is low, and when customers are nearing rebate thresholds.
Sell More with Simple, Customer-Specific Actions for Sales
B2B spare parts companies often miss opportunities to have discussions with customers about what products they should be buying. A revenue operations and intelligence solution uses advanced data science to easily uncover all new relevant opportunities, continually refresh those insights, and systematically deliver them to salespeople using traditional business intelligence tools or spreadsheets.
Consider the typical, large B2B company with thousands of products and customers: Even with an army of analysts, generating guidance for each unique opportunity is an insurmountable task. Giving sales teams timely, relevant sales guidance is only possible through a platform that can uncover insights using data science and operationalize them in a closed-loop manner.
A revenue operations and intelligence tool can equip sales with guided actions, which can help:
Increase wallet-share with new and existing customers Identify the best-fit products for prospecting Win-back lost business Sell excess inventory Flag customer agreements that don’t meet volume commitments Identify and recommend products substitutions or preferred brands Deliver actions directly to eCommerce, marketing, and sales-led channels
Today’s turbulent B2B market will not wait for the laggards to sort out their data-driven sales strategies through cumbersome, drawn-out software projects. The good news is that the Zilliant Quick Start package for Revenue Operations and Intelligence offers an accelerated path to grow revenue with intelligent customer-specific actions and can be deployed in as few as three weeks. This means the valuable insights hiding inside your customer data sets can be translated into real, revenue-driving opportunities in about a month.
Conclusion
Spare parts companies have a substantial opportunity in 2023 as an increase in demand is in the cards despite economic uncertainty. By taking heed of the above strategies to ensure rationally aligned price updates and empower sales teams, B2B spare parts companies can avoid troublesome margin leakage, ensure long-term profitability and stay ahead of the competition.
